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CUNA supports Fed term deposit plan with caveats

WASHINGTON (2/3/10)--The Credit Union National Association (CUNA) announced its support for the Federal Reserve’s (Fed) plans to amend Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of interest-bearing term deposits at Federal Reserve Banks, but cautioned the Fed to “consider any unintended effects of the plan.” According to the Fed, these term deposits “are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances,” and credit unions are among the financial institutions that are eligible to invest in term deposits. While CUNA believes that the term deposit authorization “may provide a favorable option for institutions to earn interest on short term investments without credit risk,” CUNA is concerned that selecting those who may invest in term deposits via an auction process could lead to domination of that auction process by larger financial institutions. CUNA suggested that the Fed include in the final rule a process to allow smaller financial institutions to participate in these auctions as a group. CUNA also would favor allowing participating institutions to use term deposits as collateral for borrowing from the Fed’s discount window if a process that would give smaller financial institutions a chance at "winning" an auction is included in the final rule. CUNA also recommended that the maturity rate of these investments should be measured in 30-day increments, and asked the Fed to consider allowing early redemption of term deposits, with a corresponding penalty, under certain limited circumstances. For the full comment letter, use the resource link.